18386 Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Rules and Regulations 

REVISIONS TO IFR ALTITUDES AND CHANGEOVER POINTS—Continued 

[Amendment 467, effective date May 10, 2007] 

From To MEA 

S BND ........................................................................................ 8000 

N BND ........................................................................................ 10000 

KLUNG, AK FIX .......................................................................... GULKANA, AK VOR/DME.

N BND ........................................................................................ 6500 

S BND ........................................................................................ 10000 

GULKANA, AK VOR/DME .......................................................... DOZEY, AK FIX.

N BND ........................................................................................ 12000 

S BND ........................................................................................ 4000 

DOZEY, AK FIX .......................................................................... PAXON, AK FIX.

S BND ........................................................................................ 7000 

N BND ........................................................................................ 12000 

PAXON, AK FIX .......................................................................... DONEL, AK FIX ......................................................................... *12000 

*11500—MOCA 

DONEL, AK FIX .......................................................................... *BIG DELTA, AK VORTAC.

N BND ........................................................................................ 7000 

S BND ........................................................................................ 12000 

*7800—MCA BIG DELTA, AK VORTAC, S BND 

*10500—MCA DONEL, AK S BND 

[FR Doc. E7–6886 Filed 4–11–07; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9323] 

RIN 1545–BF64 

Revisions to Regulations Relating to 

Repeal of Tax on Interest of 

Nonresident Alien Individuals and 

Foreign Corporations Received From 

Certain Portfolio Debt Investments 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations under sections 871 and 881 

of the Internal Revenue Code (Code) 

relating to the exclusion from gross 

income of portfolio interest paid to a 

nonresident alien individual or foreign 

corporation. These regulations clarify 

how the portfolio interest rules apply 

with respect to interest paid to a 

partnership (or simple or grantor trust) 

that has foreign partners (or 

beneficiaries or owners). These 

regulations also retroactively remove the 

rule in Treasury Regulation § 1.1441–

1(b)(7)(iii) that would impose interest 

under section 6601 when no underlying 

tax liability is due. 

DATES: Effective Date: These regulations 

are effective on April 12, 2007. 

Applicability Dates: The regulations 

relating to the application of the 10- 

percent shareholder test for interest paid 

to partnerships applies to interest paid 

after April 12, 2007. However, taxpayers 

may choose to apply the rules in the 

final regulations to interest paid during 

any taxable year which is not closed by 

the period of limitations, provided they 

do so consistently with respect to all 

relevant partnerships during such years. 

The regulations removing the rule 

imposing interest and penalties on 

withholding agents when no underlying 

tax has in fact been imposed apply to 

payments made after December 31, 

2000. 

FOR FURTHER INFORMATION CONTACT: 

Kathryn Holman of the Office of the 

Associate Chief Counsel (International), 

(202) 622–3840 (not a toll-free call). 

SUPPLEMENTARY INFORMATION: 

Background 

Section 871(a) of the Code imposes a 

tax of 30 percent on U.S. source fixed 

or determinable annual or periodic 

(FDAP) income, including interest, 

received by a nonresident alien 

individual to the extent the amount so 

received is not effectively connected 

with the conduct of a trade or business 

within the United States. Section 881(a) 

imposes a similar tax with respect to 

FDAP income, including interest, 

received by a foreign corporation. Both 

sections 871(h)(3)(A) and 881(c)(3)(B) 

provide, among other limitations, that 

portfolio interest does not include 

interest received by a 10-percent 

shareholder, as defined in section 

871(h)(3)(B). 

Explanation of Provisions and 

Summary of Comments 

The IRS and the Treasury Department 

issued proposed regulations (REG–

118775–06) under sections 871(h) and 

881(c) in the Federal Register (71 FR 

34047) on June 13, 2006. The proposed 

regulations address the application of 

the 10-percent shareholder test when 

U.S. source interest is paid to a 

partnership that has a nonresident alien 

individual or foreign corporation as a 

partner. The proposed regulations 

provide that, for interest paid on 

obligations issued on or after the date 

that final regulations are published, the 

10-percent shareholder test is to be 

applied only at the partner level and at 

the time that the withholding agent 

would otherwise be required to 

withhold. 

No public hearing was requested or 

held. However, a few comments were 

received. After consideration of the 

comments, the proposed regulations are 

adopted in these final regulations, with 

two modifications. In addition, these 

final regulations implement section 5 of 

Notice 2006–99 (46 IRB 907) (See 

§ 601.601(d)(2) of this chapter), 

modifying § 1.1441–1(b)(7)(iii), as 

discussed below. 

1. Time for Applying the 10-Percent 

Shareholder Test 

The proposed regulations provide that 

the 10-percent shareholder test applies 

at the time the withholding agent would 

otherwise be required to withhold. The 

regulations then provide an example in 

which the test is stated to apply on the 

‘‘earliest’’ of when the interest is 

distributed, the date the statement 

under section 6031(c) is mailed, or the 

due date for furnishing the statement. In 

order to make clear that the test may be 

applied on multiple dates (and not only 

on the date of a first partial distribution 

of such interest), the example has been 


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Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Rules and Regulations 18387 

rephrased. The example now states that 

the 10-percent shareholder test is 

applied when any distributions that 

include the interest are made to a 

foreign partner and, to the extent that a 

foreign partner’s distributive share of 

the interest has not actually been 

distributed, on the earlier of the date 

that the statement required under 

section 6031(c) is mailed or otherwise 

provided to such partner, or the due 

date for furnishing such statement. This 

change conforms more closely to the 

language of § 1.1441–5(c)(2). 

2. Effective Date of the Regulation 

The new provisions set forth in the 

proposed regulations were proposed to 

apply to interest paid on obligations 

issued after the date that final 

regulations are published. One 

commentator stated that, in order to 

provide for consistency and to eliminate 

uncertainty and avoid possible disputes 

with respect to interest paid to 

partnerships prior to the date that the 

final regulations are published, the final 

regulations should apply to interest paid 

after July 18, 1984, with respect to 

obligations issued after July 18, 1984, 

the effective date of the portfolio 

interest provisions. Another 

commentator stated that the final 

regulations should apply to interest paid 

after the date the final regulations are 

issued. 

The IRS and the Treasury Department 

agree that taxpayers should be able to 

apply the regulations to interest paid in 

certain prior taxable years. Accordingly, 

while the final regulations generally 

provide that the provisions relating to 

the 10-percent shareholder test for 

interest paid to partnerships are to 

apply to interest paid after the date the 

regulations are published as final 

regulations, the regulations also permit 

taxpayers to choose to apply the 

provisions to interest paid in any 

taxable year that is not closed by the 

period of limitations, provided that the 

taxpayer consistently applies the 

provisions to all relevant partnerships 

during such years. 

3. Interest Imposed When No Tax Due 

Treasury Regulation § 1.1441–

1(b)(7)(iii) provides that a withholding 

agent that has failed to withhold tax 

other than based on reliance on the 

appropriate presumptions is not 

relieved from liability for interest under 

section 6601. It further provides that 

such liability exists even when there is 

no underlying tax that is ultimately 

shown to be due. That is, the regulation 

imposes an interest charge under 

section 6601 on a withholding agent for 

an amount of tax that has not in fact 

been imposed. Treasury Regulation 

§ 1.1441–1(b)(7)(v) sets forth two 

examples that illustrate the operation of 

this rule. 

In Notice 2006–99 (2006–46 IRB 907), 

the IRS and the Treasury Department 

announced their intention to remove the 

rule in Treasury Regulation § 1.1441–

1(b)(7)(iii), and the accompanying 

examples illustrating the rule in 

Treasury Regulation § 1.1441–1(b)(7)(v), 

that impose interest under section 6601 

when no underlying tax liability is 

imposed. Further, the Notice announced 

that the IRS and the Treasury 

Department intend to clarify that, like 

interest, penalties that are computed 

based on underpayments of tax will not 

be imposed when no tax has in fact been 

imposed. 

These final regulations retroactively 

remove, in accordance with Notice 

2006–99, the rule in § 1.1441–1(b)(7)(iii) 

that would impose interest and 

penalties based on hypothetical 

underpayments of tax when in fact no 

tax has been imposed. The examples 

illustrating this rule in Treasury 

Regulation § 1.1441–1(b)(7) are also 

removed. 

Special Analyses 

It has been determined that these 

regulations are not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations, and because the 

regulations do not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, the 

proposed rulemaking preceding these 

regulations was submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of the proposed 

regulations is Kathryn Holman, Office of 

Associate Chief Counsel (International). 

However, other personnel from the IRS 

and the Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.871–14 is amended 

as follows: 

■ 1. Paragraphs (g) and (h) are 

redesignated as paragraphs (h) and (i), 

respectively. 

■ 2. New paragraph (g) is added. 

■ 3. Newly-designated paragraph (i)(1) 

is amended by adding two sentences at 

the end of the paragraph. 

The additions read as follows: 

§ 1.871–14 Rules relating to repeal of tax 

on interest of nonresident alien individuals 

and foreign corporations received from 

certain portfolio debt investments. 

* * * * * 

(g) Portfolio interest not to include 

interest received by 10-percent 

shareholders—(1) In general. For 

purposes of section 871(h), the term 

portfolio interest shall not include any 

interest received by a 10-percent 

shareholder. 

(2) Ten-percent shareholder—(i) In 

general. The term 10-percent 

shareholder means—

(A) In the case of an obligation issued 

by a corporation, any person who owns 

10-percent or more of the total 

combined voting power of all classes of 

stock of such corporation entitled to 

vote; or 

(B) In the case of an obligation issued 

by a partnership, any person who owns 

10-percent or more of the capital or 

profits interest in such partnership. 

(ii) Ownership—(A) Stock ownership. 

For purposes of paragraph (g)(2)(i)(A) of 

this section, stock owned means stock 

directly or indirectly owned and stock 

owned by reason of the attribution rules 

of section 318(a), as modified by section 

871(h)(3)(C). 

(B) Ownership of partnership interest. 

For purposes of paragraph (g)(2)(i)(B) of 

this section, rules similar to the rules in 

paragraph (g)(2)(ii)(A) of this section 

shall be applied in determining the 

ownership of a capital or profits interest 

in a partnership. 

(3) Application of 10-percent 

shareholder test to partners receiving 

interest through a partnership—(i) 

Partner level test. Whether interest paid 

to a partnership and included in the 

distributive share of a partner that is a 

nonresident alien individual or foreign 

corporation is received by a 10 percent 

shareholder shall be determined by 

applying the rules of this paragraph (g) 

only at the partner level. 

(ii) Time at which 10-percent 

shareholder test is applied. The 


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18388 Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Rules and Regulations 

determination of whether a nonresident 

alien individual or foreign corporation 

that is a partner in a partnership is a 10- 

percent shareholder under the rules of 

section 871(h)(3), section 881(c)(3), and 

this paragraph (g) with respect to 

interest paid to such partnership shall 

be made at the time that the 

withholding agent, absent the 

provisions of section 871(h), 881(c) and 

the rules of this paragraph, would 

otherwise be required to withhold under 

sections 1441 and 1442 with respect to 

such interest. For example, in the case 

of U.S. source interest paid by a 

domestic corporation to a domestic 

partnership or withholding foreign 

partnership (as defined in § 1.1441–

5(c)(2)), the 10-percent shareholder test 

is applied when any distributions that 

include the interest are made to a 

foreign partner and, to the extent that a 

foreign partner’s distributive share of 

the interest has not actually been 

distributed, on the earlier of the date 

that the statement required under 

section 6031(c) is mailed or otherwise 

provided to such partner, or the due 

date for furnishing such statement. See 

§ 1.1441–5(b)(2) and (c)(2)(iii). 

(4) Application of 10-percent 

shareholder test to interest paid to a 

simple trust or grantor trust. Whether 

interest paid to a simple trust or grantor 

trust and distributed to or included in 

the gross income of a nonresident alien 

individual or foreign corporation that is 

a beneficiary or owner of such trust, as 

the case may be, is received by a 10- 

percent shareholder shall be determined 

by applying the rules of this paragraph 

(g) only at the beneficiary or owner 

level. The 10-percent shareholder test is 

applied with respect to a nonresident 

alien individual or foreign corporation 

that is a beneficiary of a simple trust or 

an owner of a grantor trust at the time 

that a withholding agent, absent any 

exceptions, would otherwise be 

required to withhold under sections 

1441 and 1442 with respect to such 

interest. 

* * * * * 

(i) * * * (1) * * * The rules of 

paragraph (g) apply to interest paid after 

April 12, 2007. Taxpayers may choose 

to apply the rules of paragraph (g) to 

interest paid in any taxable year not 

closed by the period of limitations as of 

April 12, 2007, provided they do so 

consistently for all relevant partnerships 

during such years. 

■ Par. 3. Section 1.881–2 (a)(6) is added 

to read as follows: 

§ 1.881–2 Taxation of foreign corporations 

not engaged in U.S. business. 

(a) * * * 

(6) Interest received by a foreign 

corporation pursuant to certain portfolio 

debt instruments is not subject to the 

flat tax of 30 percent described in 

paragraph (a)(1) of this section. For rules 

applicable to a foreign corporation’s 

receipt of interest on certain portfolio 

debt instruments, see sections 871(h), 

881(c), and § 1.871–14. 

* * * * * 

■ Par. 4. Section 1.1441–1(b)(7) is 

amended as follows: 

■ 1. Paragraph (b)(7)(iii) is revised. 

■ 2. Paragraph (b)(7)(v) is removed. 

The revision reads as follows: 

§ 1.1441–1 Requirement for the deduction 

and withholding of tax on payments to 

foreign persons. 

* * * * * 

(b) * * * 

(7) * * * 

(iii) Liability for interest and 

penalties. For payments made after 

December 31, 2000, if a withholding 

agent fails to deduct and withhold any 

tax imposed under sections 1441 or 

1442, and the tax against which such tax 

may be credited under section 1462 is 

paid, then the amount of tax required to 

be deducted and withheld shall not be 

collected from the withholding agent. 

However, the withholding agent is not 

relieved from liability for interest or any 

penalties or additions to the tax 

otherwise applicable in respect of the 

failure to deduct and withhold. See 

section 1463. Further, in the event that 

a tax liability is assessed against the 

beneficial owner under section 871, 881, 

or 882 and interest under section 

6601(a) is assessed against, and 

collected from, the beneficial owner, the 

interest charge imposed on the 

withholding agent shall be abated to 

that extent so as to avoid the imposition 

of a double interest charge. 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: March 30, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E7–6766 Filed 4–11–07; 8:45 am] 

BILLING CODE 4830–01–P 

POSTAL SERVICE 

39 CFR Part 111 

New Standards for Mailing Adult Fowl 

AGENCY: Postal Service 

ACTION: Final rule. 

SUMMARY: The Postal Service revises the 

requirements for containers used for 

mailing adult chickens. The new 

standards require all mailable adult 

fowl, including chickens, to be mailed 

in containers approved by the manager 

of Mailing Standards. 

EFFECTIVE DATES: April 12, 2007. 

FOR FURTHER INFORMATION CONTACT: Bert 

Olsen, 202–268–7276. 

SUPPLEMENTARY INFORMATION: The Postal 

Service published a proposal in the 

Federal Register (71 FR 32, February 16, 

2007) to revise the standards for mailing 

containers when shipping chickens. The 

revised mailing standards would 

promote the safety of our employees, 

customers, and all mailed adult fowl. 

Comments Received 

We received one comment. The 

commenter stated that no birds should 

be mailed in the United States because 

of a chance of spreading bird diseases. 

We have accepted birds in the mail 

for many years without incident, and we 

are comfortable in continuing to provide 

service to bird industries as well as 

individual customers. We are aware of 

concerns associated with handling bird 

containers in transit, and we will 

continually monitor and revise our 

mailing requirements to mitigate 

potential risk. 

We adopt the following amendments 

to Mailing Standards of the United 

States Postal Service, Domestic Mail 

Manual (DMM), incorporated by 

reference in the Code of Federal 

Regulations. See 39 CFR 111.1. 

List of Subjects in 39 CFR Part 111 

Administrative practice and 

procedure, Postal Service. 

■ Accordingly, 39 CFR part 111 is 

amended as follows: 

PART 111—[AMENDED] 

■ 1. The authority citation for 39 CFR 

part 111 continues to read as follows: 

Authority: 5 U.S.C. 552(a); 39 U.S.C. 101, 

401, 403, 404, 414, 416, 3001–3011, 3201–

3219, 3403–3406, 3621, 3626, 5001. 

■ 2. Revise the following sections of 

Mailing Standards of the United States 

Postal Service, Domestic Mail Manual 

(DMM), as follows: 

600 Basic Standards for All Mailing 

Services 

601 Mailability 

* * * * * 

9.0 Perishables 

* * * * * 


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